Empirical Analysis on the Performance of Rated and Non-Rated Islamic Financial Institutions

Purpose – The purpose of this research is to provide insight into the gaps in financial performance that Islamic Financial Institutions (IFIs) decision-makers need to address prior to soliciting a Credit Rating (CR).
Design/methodology/approach – The researcher examines the effect of Capital adequacy, Asset quality, Management quality, Earnings management, and Liquidity management (CAMEL) on CR status (i.e., rated or not rated) using t-test, Mann-Whitney test, and binary logistic regression. The sample includes 143 IFIs operating across 29 countries over a ten-year span from the year 2010 to 2019.
Findings – The findings of this study confirm significant differences between non-rated and rated IFIs in terms of size, capital adequacy, asset quality, management quality, and liquidity management. The non-rated IFIs are smaller in size, more capitalised, and have lower credit risk. On the other hand, they experience managerial inefficiency in managing their operating income and expenses, and they are not utilising their assets as efficiently as rated IFIs.
Originality/value – Complements existing limited literature on IFIs’ creditworthiness and identifying the key indicators that significantly affect the CR status will help managers modify their strategies to be engaged in the CR process, increase transparency, and reduce asymmetric information problem.